Wealth Builder: We are stashing away money for our children’s future and the returns are pathetic. Surely there are better options?

Daily Mail Australia’s new columnist – James Wrigley, Principal Financial Adviser with First Financial, answers readers’ money questions every Wednesday.

Hi James,

What is the best way to put money aside for our children’s future?

Currently, we are depositing amounts in a bank account in our children’s name, but the interest is pathetic. What can we do to have better long-term returns and be tax efficient?

Kate

Hi Kate,

Great question & one that comes a lot from parents.

Before I get into your options, it’s important to understand that minors (children under the age of 18) pay a different tax rate than adults on unearned income. Unrecognized income is such as interest on a bank account, dividends from shares, rent from properties or distributions from trusts.

A minor can only earn $416 in unearned income before they start paying tax. Unearned income between $417 & $1,307 is taxed at 66%, and unearned income above $1,307 is taxed at 45%. It seeks to prevent adults from putting large amounts of income & assets in their children’s names and avoid paying tax in the process.

If the bank account or investment is in the name of a child, the child will have to pay the above taxes. Alternatively, as a parent you can have a bank account or investment in your name (for the children) and add any income to your tax return and be taxed accordingly. If you are a low income earner, this is a good option.

Getting back to your question about better long-term returns.

m First choice Trying to find the highest interest cash account or savings account available may not be with the bank you bank with on a daily basis. Note that the above tax considerations still apply.

m Second option – and only appropriate if you have a long-term horizon (think 10 years) – investing for your children in the stock market. In this case, low cost, diversified index style share market investments are a good fit. You can use any number of micro investment platforms to facilitate this at low cost and add some form of regular deposit to the investment.

Depending on which platform you use it may need to be owned in your name for your child. As with cash account, the same tax rule applies. Although historical returns cannot be relied upon for future returns, it is likely to provide better long-term returns than cash in the bank.

m A third option Using what is called an investment bond. An investment bond is an independent tax structure where the tax on earnings is up to a maximum of 30%.

Just like you can choose an investment option in your superannuation fund, you can choose an investment option in an investment bond. They range from cash options to index style share investments and beyond – it’s up to you. The bond has the advantage of being taxed internally at a maximum of 30%, which may be lower than the tax rate you or your children would pay, as well as giving you the ability to earn long-term share market returns. The downside of an investment bond is that it is likely to incur higher fees than the micro share investing platforms in option 2. You have to weigh the benefits Vs the costs.

I hope this helps.

All the best.

James

Send your questions to James at thewealthbuilder@dailymail.com.au

JAMES WRIGLEY FIRST FINANCIAL PTY LTD ABN 15 167 177 817 AFSL 481098 Representative

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